An Introduction to Employee Ownership Trusts (EOTs)

Introduction

Employee Ownership Trusts (EOTs) have become an established succession option for UK business owners, particularly those seeking a structured exit without selling to a third party.

Introduced in 2014, the model allows a company to transfer a controlling stake (51% or more) to a trust that holds shares on behalf of its employees. In return, the owner can realise value from the business while maintaining continuity and protecting the long-term future of the company.

Recent legislative changes have adjusted the tax position, but EOTs remain a credible and widely used exit route for many SMEs.

1. What Is an Employee Ownership Trust?

An Employee Ownership Trust is a structure that:

• Acquires a controlling interest (51%+) in a company
• Holds shares collectively on behalf of employees
• Operates for the benefit of the workforce as a whole

Employees do not buy shares individually. Instead, they become beneficiaries of the trust, participating in the success of the business through bonuses and long-term stability.

Legislation reference: Finance Act 2014 Schedule 37 (EOT provisions).

Government overview: Employee ownership.

2. Why Owners Choose an EOT

EOTs are not purely tax-driven. In practice, they are chosen for a combination of commercial, cultural and structural reasons.

No Need to Find an External Buyer

One of the most significant advantages is that the trust itself becomes the purchaser.

This removes the need to:

• Market the business
• Negotiate with trade buyers
• Engage with private equity
• Risk disruption during a sale process

Business Continuity and Independence

An EOT allows the company to continue operating:

• With existing leadership
• Without external ownership pressure
• While retaining its culture and identity

This is particularly relevant for engineering, manufacturing and professional services firms.

Flexible Transition for Founders

Owners can:

• Exit immediately
• Step back gradually
• Remain involved as directors or advisers

This flexibility is often not available in traditional sale processes.

Employee Engagement

Employee ownership can support:

• Retention
• Long-term thinking
• Alignment between staff and business performance

3. How an EOT Transaction Works

Most EOT transactions follow a structured process.

Independent Valuation

A valuation is carried out to determine a fair market value for the shares. This is typically:

• Commercially negotiated
• Supported by financial analysis

Creation of the Trust

A trust is established to:

• Acquire shares
• Hold them on behalf of employees

Sale of Shares

The owner sells:

• At least 51% of the company
• Often more, depending on objectives

Deferred Consideration

In most cases:

• The purchase price is paid over time
• Funded through future company profits

Governance Structure

The trust must comply with:

• Independence rules
• Employee representation requirements
• Balanced decision-making

4. Funding the EOT: How Sellers Are Paid

EOT transactions are typically funded in one of three ways.

Immediate Payment

Where the company has sufficient cash reserves, part of the consideration can be paid upfront.

Deferred Payments (Most Common)

The seller becomes a creditor of the company, repaid over time from profits. These payments generally take priority over:

• Dividends
• Employee profit distributions

External Funding

Bank finance may be used in some cases, although this is less common in current conditions.

5. Tax Position (Post-2025 Changes)

Historically, EOTs were associated with a 0% Capital Gains Tax (CGT) outcome for qualifying disposals.

Following recent changes:

• Full CGT exemption has been restricted
• Relief is now typically partial rather than absolute
• The structure remains more favourable than many alternatives, depending on circumstances

Employees can still benefit from tax-free bonuses of up to £3,600 per year (income tax-free, NIC applies).

The tax position should always be reviewed in detail based on current legislation and transaction structure.

6. Governance and Compliance Requirements

To qualify, an EOT must:

• Maintain a controlling interest (51%+)
• Operate for the benefit of all eligible employees
• Avoid disproportionate benefit to key individuals
• Meet trustee independence rules (often referred to as the “40% rule”)

These rules are designed to ensure that employee ownership is genuine and not used as a tax-driven structure alone.

7. Who Is a Good Fit for an EOT?

EOTs are typically suitable for:

• Profitable UK SMEs
• Businesses with consistent cashflow
• Strong management teams
• Owners seeking a values-led exit
• Companies in engineering, manufacturing, professional services and technology

8. HMRC Clearance

Many businesses seek non-statutory clearance from HMRC before proceeding.

This helps confirm that:

• The structure meets qualifying conditions
• Reliefs are likely to apply

See HMRC’s guidance on non-statutory clearance.

Clearance does not confirm valuation, but provides additional confidence in the structure.

9. What to Consider Before Choosing an EOT

Before proceeding, owners should assess:

• Future profitability (to fund deferred payments)
• Leadership succession
• Governance readiness
• Employee engagement
• Group structure
• Interaction with other tax planning

EOTs introduce greater transparency and governance requirements, which should be planned for in advance.